Question

(Alternative dividend policies) Final earnings estimates for the Smithfield Meat Packing Company have been prepared for the CFO of the company and are shown in the following table: . The firm has 7,400,000 shares of common stock outstanding. As assistant to the CFO, you are asked to determine the yearly dividend per share to be paid depending on the following possible policies: a. A stable dollar dividend targeted at 50 percent of earnings over a 5-year period. b. A small, regular dividend of $0.60 per share plus a year-end extra when the profits in any year exceed $20,000,000. The year-end extra dividend will equal 60 percent of profits exceeding $20,000,000. c. A constant dividend payout ratio of 35 percent.

Answer 1

Part-a:

Year	Profit After Taxes
1	18,000,000
2	21,000,000
3	19,000,000
4	23,000,000
5	25,000,000
	106,000,000

Average Earnings per year over 5 years = $106,000,000/5

= $21,200,000

.

.

Total Dividend to be paid every year = 50% of Average Earnings

= 50 % of $21,200,000

= $10,600,000

.

.

Average dividend per share to be paid depending on a stable dollar dividend targeted at 50% of earnings for year 1 through 5 = Total Dividend to be paid every year/No. of Shares outstanding

= 10,600,000/7,400,000

= $1.43 per share.

.

.

Part-b:

Dividend to be paid every year :

{1}	{2}	{3} = {2}-20,000,000	{4} = {3}/7,400,000	{5}	{6} = {4} + {5}
Year	Profit After Taxes	Profit in excess of $20,000,000	Excess Divdend per share	Regular Dividend per share	Total Dividend per Share
1	18,000,000	-	-	0.60	0.60
2	21,000,000	1,000,000	0.14	0.60	0.74
3	19,000,000	-	-	0.60	0.60
4	23,000,000	3,000,000	0.41	0.60	1.01
5	25,000,000	5,000,000	0.68	0.60	1.28

.

.

Part-c:

Dividend to be paid every year :

{1}	{2}	{3}	{4} = {2]*{3}	{5}	{6} = {4}/{5}
Year	Profit After Taxes	Payout Ratio	Dividend paid every year	No. of Shares	Dividend per share
1	18,000,000	35%	6,300,000	7,400,000	0.85
2	21,000,000	35%	7,350,000	7,400,000	0.99
3	19,000,000	35%	6,650,000	7,400,000	0.90
4	23,000,000	35%	8,050,000	7,400,000	1.09
5	25,000,000	35%	8,750,000	7,400,000	1.18